The FHA loan program makes it possible to purchase a home with as little as 3.5 percent down and with a lower credit score than required by traditional mortgages. (Click here for a thorough introduction to the FHA loan program.)
FHA loans are not just for first-time home buyers, and they’re not restricted to low-income applicants. Here are the requirements you’ll need to meet to qualify for an FHA loan.
1. Have verifiable income.
Steady income that you can verify with pay-stubs or tax returns is the first and most important requirement to get an FHA loan. In general, lenders want to see that you’ve worked for a year or two in the same field (if not the same employer). Under the FHA program, a lender may accept a shorter work history.
2. Be able to afford the housing payment AND any existing debt.
The biggest factor in qualifying for an FHA loan is whether you can afford the payment. As a rough guideline:
- your mortgage payment must not be more than 35 percent of your income (before taxes) and
- your mortgage payment PLUS other monthly debt payments (car loan, credit cards) must not be more than 48 percent of your income.
You can use our home affordability calculator to see approximately how much house you can qualify for. If you can’t meet these ratios yet, focus on paying off as much other debt as you can before buying a home.
3. Save at least a 3.5 percent down payment.
The minimum required down payment for an FHA loan is 3.5 percent. In reality, you’ll need to save closer to 6 percent of the home’s purchase price to account for closing costs- – which include an upfront mortgage insurance premium equal to 1.75 percent of the home’s value. You can reduce this premium to 1.25 percent by undergoing an FHA-approved credit counseling program prior to closing.
4. Have an established credit history.
At the bare minimum, the FHA requires that applicants have an established credit history with at least two lines of credit (for example, a student loan and a credit card).
5. Have a FICO score of at least 580-640.
The minimum FICO score to qualify for the FHA loan program is 580, but the FHA is not a lender, it’s the insurer, and it’s the lender who sets their minimum credit score requirements, which often sit around 640 for FHA loans (as opposed to 700 for conventional mortgages).
If you don’t know your credit score, check your it now for free. If your score is well above 640, you’re safe to apply for an FHA loan. If not, call your chosen mortgage lender and ask what their minimums are for processing FHA loan applications before you officially apply.
6. Purchase a home that does not exceed FHA loan limits.
There are federally-set limits to how much you can borrow with an FHA loan that vary by state and county. Fortunately however, the limits are high enough that most borrowers should not need an FHA loan to buy a more expensive home.
7. Apply for the correct type of FHA loan.
Lenders offer a variety of FHA loans in addition to the most common type, the 30 year fixed interest. You can also get a fixed interest rate on an FHA loan for 10, 15, 20 or 25 years or you can get an adjustable rate FHA loan. An adjustable rate loan allows for the fluctuation of interest rates at certain periods of time. For example, a 3/1 adjustable rate FHA loan means the interest rate is fixed for 3 years and can adjust every year thereafter. FHA adjustable loans come in the form of a 3/1, 5/1, 7/1 or 10/1 with 30 year terms. These are not as popular as fixed interest FHA loans since they provide more risk to the average homebuyer.
8. Understand the costs of an FHA loan.
The drawback of an FHA loan is the mandatory private mortgage insurance (PMI). PMI is insurance you must pay as the borrower — both upfront and monthly — that protects the lender in the event you default. PMI is required for anybody who puts less than 20 percent down on a home. Learn more about the fees associated with FHA loans.
9. Begin the application process.
If you believe you qualify for an FHA loan and are ready to apply, the first step is to get pre-approved with your lender of choice.
This could be your local bank or credit union, an independent mortgage broker, or any number of national online mortgage lenders.
Don’t be afraid to begin the process with one or two lenders and get quotes for rates, fees, and payments. Even with an FHA loan, the mortgage lending business is competitive and the differences in rates or closing costs could save you thousands.